ONI/Ciena: In Counseling?

Did Ciena Corp.'s (Nasdaq: CIEN) chilling revenue guidance give ONI Systems Inc. (Nasdaq: ONIS) cold feet (see Ciena and ONI: Wedding of the Year?)?

Metro equipment maker ONI says it's too soon to tell. But Ciena's most recent earnings call, where it announced that revenues for its current quarter would be about 32 percent lower than it had anticipated, did give ONI (and Wall Street) a bit of an unpleasant shock (see Ciena: Outlook Dim).

ONI says it has cancelled a road show that was supposed to take place this week, and some speculated this was directly due to Ciena's earnings surprise. ONI, however, is downplaying the speculation and the trip's importance. "The road trip was a 'nice-to-have-but-not-necessary' thing," says Larry Loper, ONI's VP of communications.

During Ciena's earnings conference call last week, the company said it expects second-quarter revenues to be about $100 million. This new target is down considerably from earlier estimates of $148 million. Ciena says it revised its numbers after hearing from two key customers that they would not be buying as much gear as they had anticipated.

"[The revenue forecast adjustment] was new news to them, and therefore it was new news to ONI as well," says Loper. "At this point it would be premature to speculate that this would impact the deal."

"Right now we're just moving forward with things as planned," says Ciena's PR Director Glenn Jasper. "We made it very clear when we announced our earnings and gave our guidance that we had received new information from a customer after the announcement of [the ONI deal] and that information changed our forecast."

Analysts believe the deal will still go through, not only because it makes strategic sense for both companies but also because of the high cost of backing out. If Ciena calls off the deal, ONI would get $87.2 million, and up to $2 million in expenses, according to documents filed with the Securities and Exchange Commission (SEC) on Monday. If ONI were to back out, Ciena would get $36.7 million.

So even given Ciena's upcoming revenue shortfall, the deal seems strong enough to happen. Of course, there is no telling whether there will be a redrawing of the deal's terms.

"I think the earnings news shocked Ciena and, in turn, it was a surprise to ONI," says Gabriel Lowy, an analyst with Crédit Lyonnais Securities Inc.. "There's a 75 percent, or better, chance that the companies will merge as planned. However, I think there's a 50 percent probability that the terms of the deal will change in ONI's favor."

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com